The Basics to Budgeting

Article written by: Eric Chen

Budgeting your money is a crucial habit, maybe even a necessity, to have when managing your personal finances. Fundamentally, a budget is a plan that organizes your spending by taking into consideration your personal income and expenses. But, what does budgeting do for you? Well, when it comes down to why you should budget your money, there are a plethora of
reasons for you to do it.

Here are just some of the reasons for budgeting your money.
Saves cash
Prevents overspending
Helps achieve long-term financial goals
Serves as a safety cushion for emergencies
Strengthens ability to make financial decisions

So, how do you budget? Now that you know the benefits of budgeting, the next step is to explore how to use this skill with your money. There are many effective strategies for budgeting your money. However, this post will go over two of the most popular approaches: the envelope budgeting system and the 50/30/20 budget plan.

Envelope Budgeting System
The envelope budgeting system involves the simple strategy of sorting cash into different envelopes with each envelope representing a specific financial purpose. For instance, one envelope represents an emergency fund (money only spent in emergencies) while another envelope represents money for groceries. Cash can be separated into as many envelopes as needed; however, keep in mind the amount of cash you have, since you don’t want to distribute
your cash to a point where only a little bit of money is left in each envelope.

50/30/20 Budget
The 50/30/20 budgeting rule recommends putting 50% of your income into fixed living expenses, 30% of your income into flexible expenses, and 20% of your income in savings. Examples of fixed living expenses include utility bills or car payments, and examples of flexible expenses include movie tickets or a new pair of headphones. Fixed living expenses may also be interpreted as what you need to pay while flexible expenses may be seen as buying the things you want.

Both of these strategies work extremely well whether you are a teen with a summer job or a young adult with a full-time job. However, as you get older and more experienced, budgeting plans may become more advanced, such as starting to invest a portion of your money instead of just saving. Ultimately, whether you are new or knowledgeable to personal finance, budgeting will
always be a critical skill in bettering your financial prowess.

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